Emergent Research

EMERGENT RESEARCH is focused on better understanding the small business sector of the US and global economy.

Authors

The authors are Steve King and Carolyn Ockels. Steve and Carolyn are partners at Emergent Research and Senior Fellows at the Society for New Communications Research. Carolyn is leading the coworking study and Steve is a member of the project team.

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Emergent Research works with corporate, government and non-profit clients. When we reference organizations that have provided us funding in the last year we will note it.
If we mention a product or service that we received for free or other considerations, we will note it.

A study by Yardi Matrix of coworking leases in 20 major markets found 1,166 coworking sites with 26.9 million square feet of space. That represents 1.2% of office space in those markets. Coworking has proliferated more in cities: Leases encompass 1.4% of urban office and 0.9% of suburban office space.

At 7.7 million square feet, Manhattan has by far the most coworking space, followed by Los Angeles with 3.7 million square feet. Miami has the most coworking space as a percentage of stock, at 2.7%, with Manhattan coming in second at 1.7%.

They point out they believe this is the first study to "quantify the amount of square footage of coworking space in relation to total office space within markets."

They did this by analyzing leases across the 20 major cities they studied. This is a very clever approach.

Our favorite finding is illustrated in their chart below. It shows a strong relationship between coworking and office vacancy rates by city.

This relationship makes sense. Lower vacancy rates means it's harder to find office space. It also Likely indicates traditional office space is more expensive. Both of these make coworking spaces more appealing.

We think there are other, related causal factors at play here. In particular, cities with higher concentrations of tech and tech related companies seem to correlate with low office vacancy rates and more coworking spaces. So a city's industry structure may also help explain this relationship.

The reasons for the disparity have to do with definitions and methods. Yardi only looked at 20 major markets while we looked at the entire U.S.

Yardi also only included coworking spaces in building with 50,000 or more square feet. They did this because there are lots of small buildings and to analyze all the leases would have been an enormous task. But this approach meant they missed a number of small coworking spaces.

Yardi also only included office coworking spaces, while our numbers and forecasts include other types of shared workspaces (maker spaces, shared kitchens, etc.).

When we adjust for these differences, we think Yardi's findings on number of U.S. coworking spaces is roughly consistent with ours.

At a broader level, it's good to see firms like Yardi Matrix providing data and studies on coworking. Not only does it add to our collective knowledge about coworking, it's a clear signal coworking is moving to mainstream.

One last point.

A decade ago there was only about 40,000 square feet of coworking space in the U.S. This means there is about 675 times more U.S. coworking space today than a decade ago.

The picture below (click to enlarge) is from their website and shows some of the features and benefits of coliving.

The trends driving the coliving are similar to those driving coworking. Rental space is expensive and hard to find in many cities, people are seeking community and want a greater degree of housing flexibility.

Some of the key survey findings from our coworking space member research show that:

87% of respondents report that they meet other members for social reasons, with 54% saying they socialize with other members after work and/or on weekends

79% said coworking has expanded their social networks

83% report that they are less lonely since joining a coworking space

89% report that they are happier since joining a coworking space

The bottom line from this research - and the research of others - is that there are very clear social benefits from belonging to a coworking space. This is especially true for those who work on their own.

We continue to be very optimistic about the future of coworking. We also think the U.S. market will likely accelerate again in a few years due to larger corporations embracing coworking.

But we think it will take a few years for large corporations to meaningfully move to coworking. So over the next couple of years growth will be driven by coworking's traditional customers, independent workers and startups.

This will likely lead to slower near term growth, especially in the many U.S. cities that are already well penetrated by coworking spaces.

December 18, 2017

We recently released our new coworking forecast for 2018-2022. We are projecting continued rapid growth over the next 5 years, although slower than the industry's recent dizzying pace.

The forecast was done this year with help from our friends at GCUC. These are the folks that produce a series of U.S. and international coworking conferences. This gives them a global perspective with insights that were invaluable in developing this forecast

As the chart below (click to enlarge) shows, we’re forecasting that the number of global coworking spaces will grow from 14,411 in 2017 to just over 30,000 in 2022.

For those with a statistical bent, this is an average annual growth rate of 16.1%.

We’re projecting the global number of members to grow even faster than the number of spaces. We expect the number of coworking members will grow from 1.74 million in 2017 to 5.1 million in 2022.

This is an average annual growth rate of 24.2%.

The faster rate of growth in coworking membership is due to both the increase in average square footage of coworking spaces as well as the growth in members per square foot. The reasons are:

new spaces tend to be much larger than older spaces.

existing spaces are expanding by adding more space and members.

coworking facility operators continue to figure out how to serve more members per square foot of space.

From now thru 2022 the average number of members at global coworking spaces will grow by just over a third, from 121 members in 2017 to 169 members in 2022.

A mix of trends and shifts are driving coworking’s growth. These include:

Coworking is a global phenomenon: Coworking is growing around the world and most major cities have coworking spaces. Asia/Pacific (which includes India in our work), and especially China, have embraced coworking, making APAC the world’s largest coworking market.

APAC is forecast to continue to grow rapidly over the next 5 years, with China becoming the world’s largest coworking market and India emerging as one of the world’s top five coworking markets by 2022.

Other regions forecast to grow rapidly include South and Central America, Eastern Europe and Russia and parts of Africa.

The relatively mature U.S. and European coworking markets are expected to grow more slowly than the overall global rate, with membership in these regions forecast to grow at a still healthy rate of about 15% per year over the forecast horizon.

Corporations are moving to coworking: The growing need for greater workplace flexibility and agility is leading more corporations to use coworking spaces for some of their space needs. This trend will accelerate over the next 5 years due to corporations looking to reduce their exposure to long term leases and employees insisting on more workplace options.

The real estate industry is moving too: Coworking's growth, coupled with corporate interest, is resulting in landlords and large real estate firms starting to offer coworking options to tenants. The interest and involvement by these firms will help drive demand for the coworking industry.

The global number of self-employed knowledge workers is growing: While there are no solid estimates of the total number of global self-employed knowledge workers, it’s clear their numbers are very large and growing. This growth, coupled with an increasing realization of the value of coworking by independent workers, will continue to drive demand for coworking spaces.

Startups will continue to flock to coworking spaces: Startups understand the cost, flexibility and talent attraction advantages provided by coworking spaces. Because of these advantages, coworking spaces will continue to be the location of choice for most startups.

Niche spaces are expanding the coworking market: While very large coworking spaces - and especially WeWork - get most of the attention, the number of smaller niche oriented spaces continues to grow rapidly. These spaces appeal to members with specialized interests or needs (shared biolabs, women oriented spaces, writers’ spaces, industry specific spaces, shared commercial kitchens, etc.) and attract people who likely wouldn't join a traditional coworking space.

Also, serviced office provider Regus lost one third of their market value after announcing that their operating profit for 2017 would be “materially below market expectations”.

Regus said its earnings issue was not due to competition.

Instead, they blamed Brexit - which is now commonly blamed for any business problems that occur in the UK. Regus also blamed global “disruption” as a result of natural disasters in the US for their profit problems.

We have no idea how a couple of hurricanes in the US could have a material earnings impact on a company like Regus, but we credit them for their creativity.

The WSJ article focuses on the various quirks of WeWork's CEO, and especially his penchant for tequila.

But it also mentions WeWork's revenue was $436 million last year and they are exiting 2017 with an annual revenue run rate of over $1 billion. In other words, they are big and growing at close to 100% per year.

WeWork also continues to lose a lot of money, although the article did not provide a figure. This, of course, is not unusual for high growth tech companies these days.

However, many dispute the idea that WeWork is a tech company.

According to Frank Cottle, chairman of Alliance Business Centers, "WeWork is nothing but Regus with a paint job". He is also quoted saying it's $20 billion valuation "makes no sense".

Regardless of what you think about WeWork or its valuation, it's clear they're having a competitive impact on the coworking industry.

Running a coworking business is hard work. Rent, overhead, staff, events, programming all add up quickly. Startups come and go on a daily basis as they get funding or run out of cash. It is critical to have a model that is both economically sustainable and excellent in its delivery of support, resources and community. It’s hard to do this.

Increasing competition is normal in growing industries. The downside is some industry participants get hurt or even go out of business.

We will likely see more coworking space failures over the next couple years. But we will also likely see continued growth. And, of course, coworking customers will benefit.

WeWork and other "big coworking" spaces tend to attract most of the attention. But the continued rise of niche spaces clearly indicates that coworking and the workspace-as-a-service industry is here to stay.

Examples in the article range from Unsettled, a firm that organizes 30-day international coworking experiences for groups of digital nomads, to Nomad Cruise, which run two-week networking cruises for digital nomads twice a year.

“Travel has changed,” Ms. Jungersted said. “Everyone wants to be a temporary local.”

But breaking into local cultures and being a temporary local is not easy. Which is why demand for services that help people better integrate into foreign countries and cultures is growing rapidly.

These services create places and experiences where digital nomads meet and interact with local residents.

Coworking facilities in Bali and Chiang Mai were some of first to recognize this need. Now these types of spaces, places and services are sprouting up around the world.

Roam, for example, is a network of co-living/coworking properties in Miami, Bali, Madrid, Tokyo and London. They plan to have eight more locations by the end of the year.

Key quote on their appeal:

Roam is geared to remote workers “who need a reliable base in different cities,” said Bruno Haid, the company’s chief executive. Each location has communal living areas, with meeting rooms, a co-working space and fast Wi-Fi, and offers social activities, often unique to the locale.

“It offers a much deeper sense of the local experience and is more affordable than most traditional hotels and apartments,”

South African digital nomad Tyrone Niland added:

“The opportunity to go live in a foreign city for a month and interact with the local people and experience their culture — that’s priceless to me."

We expect the digital nomad trend to continue to gain strength. The opportunity to combine work with experiencing local cultures is simply too appealing - especially for travel oriented millennials and baby boomers - for it not to.